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Estate of Roger Lellock v. Prudential Insurance Co.

submitted: January 20, 1987.

ESTATE OF ROGER LELLOCK, APPELLANT,
v.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, A CORP., AND THE UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION, APPELLEES



On Appeal from the United States District Court for the Western District of Pennsylvania, Pittsburgh, D.C. Civil No. 85-1242.

Author: Gibbons

Opinion OF THE COURT

GIBBONS, Chief Judge :

The Estate of Roger Lellock (The Estate) appeals from the district court's grant of summary judgment in favor of the United States of America, the Small Business Administration (SBA). The district court ruled that the SBA possesses a valid lien on the proceeds of Prudential Insurance Company Policy No. 25 905 442 which survived the Lellocks' bankruptcy proceedings. The Estate contends that there was no "lien" on the policy within the meaning of 11 U.S.C. § 101(31) (Supp. III 1985) and that even if there was a lien, there was no "property" in existence at the time of the filing of the bankruptcy petition or within 180 days thereafter to which the alleged lien could attach. We find the Estate's contentions without merit, and thus we affirm.

I.

In August, 1980, Roger Lellock applied for a loan with the National Bank of the Commonwealth (National Bank). The National Bank asked the SBA to guarantee 90% of the $250,000 loan that the Bank was willing to make to Lellock and the Lellock Motor Sales. The SBA agreed on the condition that Lellock provide, as collateral for the loan guarantee, an "assignment of life insurance on Roger A. Lellock in the amount of $165,000.00 which shall be decreasing term unless SBA approved an existing permanent type insurance." SBA Loan Authorization and Agreement at 2. The SBA approved as collateral a life insurance policy (No. 25 905 442) on Roger Lellock by Prudential Insurance Company of America which had previously been issued in March, 1980. Thereafter, in October, 1980 the National Bank made the loan to Lellock and he, in turn, assigned the proceeds of the insurance policy to the National Bank. Leah Lellock, Roger's wife and the named beneficiary of the policy also signed the assignment. The assignment was absolute and transferred to the National Bank "all rights, benefits, and advantages to be had or derived therefrom including, without limiting the generality of the foregoing, the right at any time to exercise the loan provisions thereof or to surrender the same for its cash value even though the assignment may be for collateral security only." Policy Assignment to National Bank at 1.

Lellock later defaulted on the loan and thus, in June, 1982, the National Bank requested the SBA to honor its loan guarantee. On July 12, 1982, the SBA paid $210,464.74 to the National Bank, thereby purchasing the loan. This amount constituted 90% of the unpaid balance of the principal plus interest due the National Bank on the SBA-insured loan to Roger Lellock, trading as Lellock Motor Sales. Consequently, on October 5, 1982 the National Bank assigned the proceeds of the Prudential policy on Lellock to the SBA, transferring "all of its right, title and interest" in the loan and the insurance policy. Policy Assignment to SBA at 1.

On February 14, 1983, Roger and Leah Lellock filed a Petition for Relief under Chapter 7 of the Bankruptcy Code and listed the loan by the National Bank as a debt for $308,976.20. The Prudential life insurance policy on Lellock's life, however, was not listed in the debtors' petition, either as security or as property, nor was the SBA named as one of their creditors. On August 19, 1983, the United States Bankruptcy Court for the Western District of Pennsylvania granted a discharge of the Lellocks' debts.

The life insurance policy on Lellock's life remained in effect with Lellock paying the annual policy premiums until his death on February 2, 1985. No other assignment of the policy was ever made. Upon Lellock's death, both his widow, Leah and the SBA claimed the proceeds of the policy No. 25 905 442.

Thereafter, on May 1, 1985 the Estate of Roger Lellock brought this action against the Prudential Insurance Company of America, and the United States of America, the SBA, in the Court of Common Pleas of Allegheny County, Pennsylvania, claiming the proceeds of the insurance policy on Roger Lellock's life. Upon the government's motion, on May 23, 1985 the case was removed to the United States District Court for the Western District of Pennsylvania. On September 10, 1985 the district court dismissed the complaint as to Prudential upon its payment of the policy proceeds to the Clerk of the Court. On May 8, 1986, the district court granted summary judgment in favor of the United States of America, the SBA. It held that although the underlying debt that the assignment of the policy secured was discharged, the lien against it survived the Lellocks' bankruptcy discharge.

II.

On appeal, the Estate contentions are twofold: 1) there was no "lien" against the life insurance policy within the meaning of 11 U.S.C. § 101(31): and 2) even if there was a lien, there was no "property" to which the alleged lien could attach because the insurance policy proceeds did not come into existence until Lellock's death which was not within 180 days of the filing of the bankruptcy petition. Thus, the Estate seemingly argues that the assignment of the insurance policy to the SBA was extinguished when the underlying debt was extinguished at the bankruptcy discharge. We disagree.

The Bankruptcy Code defines a lien as a "charge against or interest in property to secure payment of a debt or performance of an obligation." 11 U.S.C. § 101(31) (Supp. III 1985). The Estate urges that because the underlying debt was extinguished, Lellock was no longer obligated to make any payment to the National Bank or to the SBA and thus, there was no lien against the Prudential insurance policy. This argument, however, ignores the line of bankruptcy cases which hold that although an underlying debt is discharged in bankruptcy, the lien created before bankruptcy against property to secure that debt survives. See United Presidential Life Ins. Co. v. Barker, 31 Bankr. 145 (N.D. Tex. 1983) and the cases cited therein. We agree that the district court's analysis in Estate of Roger Lellock v. Prudential Insurance Company of America, No. 85-1242 (W.D. Pa. May 8, 1986) on this point. Section 506(d) controls and states,*fn1

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, ...


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